HomeMy WebLinkAboutItem 09.aManagement Report
for
City of Lakeville, Minnesota
December 31, 2010
M KR
C PUBLIC
ACCOUNTANTS
To the City Council
City of Lakeville, Minnesota
• Audit Summary
• Funding Cities in Minnesota
• Governmental Funds Overview
• Financial Trends and Conditions of Selected Funds
• Accounting and Auditing Updates
June 14, 2011
PRINCIPALS
Thomas M.Montague. CPA
. Tomas A. Kanunccki. (:P:1
Paul A. Rados...e h. CPA
William J. Lauer, ( :I'A
James H. Eichten. CPA
Aaron J. Nielsen. CPA
Victusia 1 - Holinha. ( :PA
We have prepared this management report in conjunction with our audit of the City of Lakeville's (the
City) financial statements for the year ended December 31, 2010. The purpose of this report is to provide
comments resulting from our audit process and to communicate information relevant to city finances in
Minnesota. We have organized this report into the following sections:
We would be pleased to further discuss any of the information contained in this report or any other
concerns that you would like us to address. We would also like to express our thanks for the courtesy and
assistance extended to us during the course of our audit.
This report is intended solely for the information and use of those charged with governance of the City,
management, and those who have responsibility for oversight of the financial reporting process and is not
intended to be, and should not be, used by anyone other than these specified parties.
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The following is a summary of our audit work, key conclusions, and other information that we consider
important or that is required to be communicated to the City Council, administration, or those charged
with governance of the City.
OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA AND GOVERNMENT AUDITING STANDARDS
We have audited the financial statements of the governmental activities, the business -type activities, each
major fund, and the aggregate remaining fund information of the City as of and for the year ended
December 31, 2010. Professional standards require that we pro%ide you with information about our
responsibilities under auditing standards generally accepted in the United States of America and
Government Auditing Standards, as well as certain information related to the planned scope and timing of
our audit. We have communicated such information to you verbally and in our audit engagement letter.
Professional standards also require that we communicate the following information related to our audit.
PLANNED SCOPE AND TIMING OF THE AUDIT
AUDIT SUMMARY
We performed the audit according to the planned scope and timing previously discussed and coordinated
in order to obtain sufficient audit evidence and complete an effective audit.
AUDIT OPINION AND FINDINGS
Based on our audit of the City's financial statements for the year ended December 31, 2010:
• We have issued an unqualified opinion on the City's financial statements.
• We reported two matters involving the City's internal control over financial reporting that we
consider to be material weaknesses:
The City has limited segregation of duties in controls over payroll due to the individual
responsible for processing payroll also having the ability to add employees to the payroll
system or alter employee pay rates or benefits.
• The City recorded a prior period adjustment of $186,003 to correct a material
misstatement in the prior years' financial statements. The adjustment, which was to
correct the recording of accounts payable and cost of goods sold for the liquor operation
as of the previous year -end, affected both the government -wide and proprietary fund
financial statements.
• The results of our testing disclosed no instances of noncompliance required to be reported under
Government Auditing Standards.
• We reported no findings based on our testing of the City's compliance with Minnesota laws and
regulations.
Overall, we found the City's financial records to be in excellent condition. This not only provides for an
efficient year -end audit, but should also provide confidence in the interim financial data used to manage
the City throughout the year.
SIGNIFICANT ACCOUNTING POLICIES
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the City are described in Note 1 of the notes to basic financial statements. No
new accounting policies were adopted and the application of existing policies was not changed during the
year.
We noted no transactions entered into by the City during the year for which there is a lack of authoritative
guidance or consensus. All significant transactions have been recognized in the financial statements in
the proper period.
CORRECTED AND UNCORRECTED MISSTATEMENTS
Professional standards require us to accumulate all known and likely misstatements identified during the
audit, other than those that are trivial, and communicate them to the appropriate level of management.
Where applicable, management has corrected all such misstatements. In addition, none of the
misstatements detected as a result of audit procedures and corrected by management, when applicable,
were material, either individually or in the aggregate, to each opinion unit's financial statements taken as
a whole.
ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS
Accounting estimates are an integral part of the basic financial statements prepared by management and
are based on management's knowledge and experience about past and current events and assumptions
about future events. Certain accounting estimates are particularly sensitive because of their significance
to the financial statements and because of the possibility that future events affecting them may differ
significantly from those expected.
The most sensitive estimates affecting the financial statements were as follows:
• Depreciation — . Management's estimates of depreciation expense are based on the estimated
useful lives of the assets.
• Net Other Post - Employment Benefit (OPEB) Liabilities — Actuarial estimates of the net OPEB
obligation is based on eligible participants, estimated future health insurance premiums, and
estimated retirement dates.
• Compensated Absences — Management's estimate is based on current rates of pay and sick leave
balances estimated to be paid out as future severance pay.
We evaluated the key factors and assumptions used to develop these accounting estimates in determining
that they are reasonable in relation to the financial statements taken as a whole.
DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT
We encountered no significant difficulties in dealing with management in performing and completing our
audit.
DISAGREEMENTS WITH MANAGEMENT
For purposes of this report, professional standards define a disagreement with management as a financial
accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be
significant to the financial statements or the auditor's report. We are pleased to report that no such
disagreements arose during the course of our audit.
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MANAGEMENT REPRESENTATIONS
We have requested certain representations from management that are included in the management
representation letter dated June 14, 2011.
MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS
In some cases, management may decide to consult with other accountants about auditing and accounting
matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves
application of an accounting principle to the City's financial statements or a determination of the type of
auditor's opinion that may be expressed on those statements, our professional standards require the
consulting accountant to check with us to determine that the consultant has all the relevant facts. To our
knowledge, there were no such consultations with other accountants.
OTHER AUDIT FINDINGS OR ISSUES
We generally discuss a variety of matters, including the application of accounting principles and auditing
standards, with management each year prior to retention as the City's auditors. However, these
discussions occurred in the normal course of our professional relationship and our responses were not a
condition to our retention.
LEGISLATION
FUNDING CITIES IN MINNESOTA
The following is a summary of significant legislative activity passed in calendar year 2010 affecting the
finances of Minnesota cities:
Local Government Aid and Market Value Homestead Credit — The 2009 legislative session
ended without an agreement on how to address significant projected state budget deficits for the 2009
and 2010 fiscal years. The Governor vetoed the budget bill proposed by the Legislature and balanced
the budget using his power of unallounent. The Governor's unallotment plan included delays in the
payment of state revenues to school districts, and a reduction in appropriations to other state
programs, including local government aid (LGA) and market value homestead credit (MVHC) to
Minnesota cities. The unallotments included reductions of approximately $128 million to calendar
year 2010 LGA and MVHC, calculated at 7.64 percent of the total calendar year 2009 aggregated
levy and LGA of the city, not to exceed $55 per capita. Cuts were to be first taken from LGA and
then from MVHC, as necessary. Cities with populations below 1,000 and below the state -wide
average tax base per capita were exempted from these cuts.
The February 2010 state budget forecast predicted an additional shortfall of $994 million for the
remainder of the 2010 -2011 biennium. The 2010 Legislature passed a supplemental budget bill in
April that addressed roughly $312 million of the additional shortfall. The bill reduced fiscal 2010
LGA and MVHC for cities by an additional $52.5 million, calculated at 3.43 percent of the total 2010
aggregated levy, LGA, and taconite aid of the city, not to exceed $28 per capita. These cuts were to
be first taken from MVHC and Then from LGA, as necessary. Cities with populations below 1,000
exempted from previous LGA and MVHC cuts were included in this round of cuts.
The April 2010 supplemental budget bill also reduces city LGA and MVHC for fiscal 2011 by
$56.5 million. About $25.4 million of this reduction is a permanent extension of the MVHC portion
of the cuts originally made through the Governor's unallotments. The Legislature also made a
permanent reduction of $31.1 million to the state's annual LGA appropriation for cities, beginning in
2011.
In May 2010, the Minnesota Supreme Court issued a ruling on a lawsuit overturning the Governor's
unallotinent of funding to a state special nutrition program. The decision, which applied only to the
cuts to this specific program, called into question all of the Governor's July 2009 unallotments. In a
one -day special session in May, the 2010 Legislature took action to ratify the majority of the
Governor's 2010 unallotments, and dealt with the remaining projected shortfall.
Levy Limitations — A 2008 law limited general operating property tax levy increases for cities with
populations over 2,500 to an inflationary increase based on the state determined implicit price deflator
(IPD) to a maximum of 3.9 percent annually for the next three calendar years. Modifications were
made in subsequent legislative sessions to allow cities subject to levy limitation to declare "special
levies" to replace the LGA and MVHC losses described above. The 2010 Legislature also established
a floor of zero percent for the inflationary increase, so levies would not be reduced in the event of
IPD deflation. The Governor's proposal to extend levy limits was not adopted by the
2010 Legislature, and levy limits remain set to expire after the 2011 tax year. However, the extension
of levy limits is expected to be revisited by the 2011 Legislature.
State Stimulus /Jobs Bill — This jobs creation bill included a number of provisions that applied to
cities, including:
• Authority for local governments to finance energy conservation improvements and collect
repayments as special assessments at the request of the property owner.
• Creation of a new "compact development" type of tax increment financing (TIF) district.
• Expanded authority to use TIF for general economic development for one year.
• Expanded authority to use excess TIF to finance new private development.
• Expanded authority for certain cities to use TIF for housing replacement in response to the
foreclosure crisis.
Interest Rates on Awards and Judgments — The 2010 Legislature exempted government entities
from a 2009 law change that increased the required interest rate on awards and judgments over
$$0,000 to 10 percent, returning the rate to the pre -2009 maximum of the greater of 4 percent or the
secondary market rate of one year U.S. Treasury bills as determined in December each year.
Pension Funding and Sustainability — The 2010 Legislature made a number of changes to improve
the sustainability of state -wide pension plans, including those administered by the Public Employees
Retirement Association (PERA). Among the changes to the Public Employee Retirement Fund
Coordinated Plan were required increases to the employer and employee contribution rates of
0.25 percent of salary each, effective January 1, 2011. Public Employee's Police and Fire Fund
employee and employer contribution rates also increased 0.2 percent and 0.3 percent of salary,
respectively, effective January 1, 2011.
STATE, OUTLOOK AND IMPORTANCE OF INTERNAL CONTROLS
The state of Minnesota has experienced a series of major budget shortfalls and a steadily deteriorating
financial condition in recent years. Local governments and other entities dependent on the state for
funding have, in turn, had to deal with the resulting state aid cuts, holdbacks, and unallotments. For the
fiscal year 2010 -2011 biennium, the state budget was balanced using several large accounting "shifts"
and one -time federal stabilization funds that greatly reduced the amount of actual aid reductions
necessary. The accounting shifts included delaying state aid payments to and accelerating property tax
revenue recognition of Minnesota school districts, essentially utilizing cash "borrowed" from the districts
to help balance the state budget. The state intends to pay these shifts back when it has the financial
ability.
Current state budget projections for 2011 -2012 predict further significant shortfalls that will need to be
addressed. Realistically, the state has already used up most of the accounting shifts available for this
purpose, and additional federal assistance cannot be counted on. The economy, while showing some
signs of recovery, is unlikely to turn around quickly enough to solve the state's budget issues in the
short-tern. All of this adds up to a period of continued financial uncertainty and a strong likelihood of
further funding cuts for Minnesota municipalities.
These circumstances have resulted in a sustained cycle of budget reductions for most Minnesota
cities. Among our clients, we have seen numerous examples of staffing cuts and reassignments that
have potentially weakened internal controls by reducing the segregation of accounting duties or
delaying the performance of key control procedures. Unfortunately, the economic downturn has also
placed additional financial strain on many individuals, elevating the risk of fraud and theft. Recent
communications from the Minnesota Office of the State Auditor have reported a substantial increase
in incidents of fraud and theft involving local governments reported to their office recently. A sound
system of internal controls is critical to safeguarding city assets and assuring that accurate and timely
financial information is available to manage the City. When faced with difficult budgetary decisions,
we encourage our clients to remain mindful of these factors and to continue to make sound financial
controls a top priority.
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PROPERTY TAXES
Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. In
recent years this dependence has been heightened, as revenue from state aids and fees related to new
development have dwindled due to the struggling economy. This has placed added pressure on local
taxpayers already beset by higher unemployment, lower property values, and tighter credit markets. As a
result, municipalities in general are experiencing increases in tax delinquencies, abatements, and
foreclosures. This instability has led to significant fiscal challenges for many local governments, and
increased the investing public's concerns about the security of the municipal debt market.
Property values within Minnesota cities experienced an average increase of 1.5 percent for taxes payable
in 2009 and an average decrease of 3.0 percent for those payable in 2010, reflecting the weak housing
market and economic recession experienced in recent years. In comparison, the City's market value
increased 1.2 percent and decreased 4.8 percent for taxes payable in 2009 and 2010, respectively. It is
important to remember that the 2010 market value is based on estimated values as of January 1, 2009, and
the housing market is still experiencing difficult times.
The following graph shows the City's changes in taxable market value over the past 10 years:
$7,000,000,000
$6,000,000,000
$5,000,000,000
$4,000,000,000
$3,000,000,000
$2,000,000,000
$1,000,000,000
$—
Taxable Market Value
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Tax capacity is considered the actual base available for taxation. It is calculated by applying the state's
property classification system to each property's market value. Each property classification, such as
commercial or residential, has a different calculation and uses different rates. Consequently, a city's total
tax capacity will change at a different rate than its total market value, as tax capacity is affected by the
proportion of the City's tax base that is in each property classification from year -to -year, as well as
legislative changes to tax rates. The City's tax capacity increased 2.1 percent in 2009 and decreased
5.4 percent for taxes payable in 2010. The following graph shows the City's change in tax capacities over
the past 10 years:
$70,000,000
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000.000
$10,000,000
$ -
Local Net Tax Capacity
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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
The following table presents the average tax rates applied to city residents for each of the last two levy
years, along with comparative state -wide and metro area rates. The general increase in rates reflects both
the increased reliance of local governments on property taxes and the recent decline in tax capacities
previously discussed.
Rates expressed as a percentage of net tax capacity
All Cities Seven - County City of
State -Wide Metro Area Lakeville
2009 2010 2009 2010 2009 2010
Average tax rate
City 36.9 39.2 33.7 36.0 33.9 36.6
County 39.3 41.0 34.7 36.8 25.8 27.2
School 22.0 23.0 22.1 24.0 28.2 29.8
Special taxing 5.5 5.9 5.9 6.5 4.2 4.9
Total 103.7 109.1 96.4 103.3 92.1 98.5
The City's portion of the tax rate has been very close to the metro area average in recent years. The
increase the City rate for 2010 was caused by the City's need to increase its levy to offset reductions in
MVHC state aid, coupled with the decline in property market values.
This section of the report provides you with an overview of the financial trends and activities of the City's
governmental funds. Governmental funds include the General Fund, special revenue, debt service, and
capital project funds. We have also included the most recent comparative state -wide averages available
from the Office of the State Auditor. The reader needs to consider the effect of inflation and other known
changes or differences when comparing this data. Also, certain data on these tables may be classified
differently than how they appear on the City's financial statements in order to be more comparable to the
state -wide information, particularly in separating capital expenditures from current expenditures.
We have designed this section of our management report using per capita data in order to better identify
unique or unusual trends and activities of your city. We intend for this type of comparative and trend
information to complement, rather than duplicate, information in the Management's Discussion and
Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population
count, which for most years is based on estimates.
GOVERNMENTAL FUNDS REVENUE
GOVERNMENTAL FUNDS OVERVIEW
The amounts received from the typical major sources of revenue will naturally vary between cities based
on their particular situation. This would include the City's stage of development, location, size and
density of its population, property values, services it provides, and other attributes. The following table
presents the City's revenue per capita of its governmental funds for the past three years, together with
state -wide averages:
State -Wide City of Lakeville
Year December 31, 2009 2008 2009 2010
Population 20,000- 100,000 54,328 55,772 55,954
Property taxes
Tax increments
Franchise and other taxes
Special assessments
Licenses and permits
Intergovernmental revenues
Charges for services
Other
Total revenue
Governmental Funds Revenue per Capita
With State -Wide Averages by Population Class
391 $ 405 $ 411 $ 420
59 16 15 17
36 10 10 10
62 14 14 10
27 26 19 18
168 41 57 76
77 124 73 72
61 51 27 22
$ 881 $ 687 $ 626 $ 645
The City's governmental funds hay typically generated less revenue per capita in total than other
Minnesota cities in its population class. The City's revenue from property taxes has been higher than
average the last three years as the City has had to increase its levy to make up for lost state aid and to
provide for debt service of recent bond issues.
The City's governmental funds received total reN enues of $36.0 million in 2010, up about $1.2 million
(3.4 percent) from the prior year. On a per capita basis, governmental fund revenue for 2010 increased
$19 from the prior year. Revenue from property taxes increased $9 per capita, as the City increased its
levy to replace lost MVHC state aid. Intergovernmental revenues increased $19 per capita, due to an
increase in state street aid of about $1.7 million. Other revenue was $5 per capita lower than last year,
mainly due to a decrease in investment income of about $122,000 in these funds.
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GOVERNMENTAL FUNDS EXPENDITURES
Similar to our discussion of revenues, the expenditures of governmental funds will vary from state -wide
averages and from year -to -year, based on the City's circumstances. Expenditures are classified into three
types as follows:
• Current — These are typically the general operating type expenditures occurring on an annual
basis, and are primarily funded by general sources such as taxes and intergovernmental revenues.
• Capital Outlay and Construction — These expenditures do not occur on a consistent basis, more
typically fluctuating significantly from year -to -year. Many of these expenditures are
project- oriented, and are often funded by specific sources that have benefited from the
expenditure, such as special assessment improvement projects.
• Debt Service — Although the expenditures for the debt service may be relatively consistent over
the term of the respective debt, the funding source is the important factor. Some debt may be
repaid through specific sources such as special assessments or redevelopment funding, while
other debt may be repaid with general property taxes.
The City's expenditures per capita of its governmental funds for the past three years, together with
state -wide averages, are presented in the following table:
Governmental Funds Expenditures per Capita
With State -Wide Averages by Population Class
State -Wide City of Lakeville
Year December 31, 2009 2008 2009 2010
Population 20,000 - 100,000 54,328 55,772 55,954
Current
General government $ 79 $ 95 $ 87 $ 84
Public safety 241 164 158 167
Public works 82 83 70 64
Parks and recreation 86 60 52 54
All other 96 — —
$ 584 $ 402 $ 367 $ 369
Capital outlay
and construction $ 267 $ 334 $ 128 $ 82
Debt service
Principal $ 126 $ 98 $ 115 $ 131
Interest and fiscal 39 81 77 72
$ 165 $ 179 $ 192 $ 203
Total expenditures in the City's governmental funds for 2010 were $36.6 million, a decrease of about
$1.7 million (4.5 percent) from the previous year. On a per capita basis, the City's funds expended a total
of $654 in 2010, down $33 from the prior year.
The City's total current expenditures for 2010 were $2 per capita higher than the prior year. Public safety
costs increased $9 per capita, mainly due to contractual increases to police salaries and benefits. Public
works expenditures declined by $6 per capita due to the City moving its street light operation from the
General Fund to the Utility Enterprise Fund in 2010. The City's capital outlay costs decreased $46 per
capita from the prior year due to a decrease in street reconstruction activity. Debt service costs for 2010
were $11 per capita higher than the previous year due debt service on new bonds issued in recent years.
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GENERAL FUND
$22,000,000
$20,000,000
$18,000,000
$16,000,000
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
FINANCIAL TRENDS AND CONDITIONS OF SELECTED FUNDS
The City's General Fund accounts for the financial activity of the basic services provided to the
community, including the administration of the municipal operation, police and fire protection, building
inspection, streets and highway maintenance, and parks and recreation. The graph below illustrates the
change in the General Fund financial position in terns of fund balance and cash balance (net of interfund
borrowing) over the last five years. We have also included a line representing annual expenditures to
reflect the change in the size of the General Fund operation over the same period.
1
General Fund Financial Position
Year Ended December 31,
I
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I
I
1
2006 2007 2008 2009 2010
MI/Fund Balance =Cash Balance (Net) Expenditures
The City's General Fund cash and investments balance at December 31, 2010 was $8,838,866, a decrease
of $2,081,521. Total fund balance at December 31, 2010 was $9,395,928 which is a decrease of
$1,810,797 from the prior year, but $1,263,324 higher than projected in the City's final budget.
As the graph illustrates, the City has generally been able to maintain healthy cash and fund balance levels
as the volume of financial activity has grown. This is an important factor because a government, like any
organization, requires a certain amount of equity to operate. A healthy financial position allows the City
to avoid volatility in tax rates; helps minimize the impact of state funding changes; allows for the
adequate and consistent funding of services, repairs, and unexpected costs; and is a factor in determining
the City's bond rating and resulting interest costs. Maintaining an adequate fund balance has become
increasingly important given the fluctuations in state funding for cities in recent years.
A trend that is typical to Minnesota local governments, especially the General Fund of cities, is the
unusual cash flow experienced throughout the year. The City's General Fund cash disbursements are
made fairly evenly during the year other than the impact of seasonal services such as snowplowing, street
maintenance, and park activities. Cash receipts of the General Fund are quite a different story. Taxes
comprise over 80 percent of the fund's total annual revenue. Approximately half of these revenues are
received by the City in July and the rest in December. Consequently, the City needs to have adequate
cash reserves to finance its everyday operations betty een these payments.
The City's General Fund balance at the end of the 2010 fiscal year represents approximately 47.5 percent
of annual expenditures based on 2010 levels. While this represents a healthy fund balance level, it should
be noted that this key ratio has declined from a high of 60.7 percent at the end of 2006.
The following chart reflects the City's General Fund revenue sources for 2010 compared to budget:
Taxes
Intergovernmental
Charges for Services
Licenses and Permits
All Other
$16,500,000
$15,000,000
$13,500,000
$12,000,000
$10,500,000
$9,000,000
$ 7,500,000
$ 6,000,000
$4,500,000
$3,000,000
$1,500,000
$ —
General Fund Revenue
Budget and Actual
a
immiimumasimmi6
$— $2 $4 $6 $8 $10 $12 $14 $16 $18
General Fund Revenue by Source
Year Ended December 31,
Taxes Intergoverr Charges for Licenses and
Services Permits
0 2006 V 2007 ❑ 2008 0 2009 0 2010
Millions
O Budget Actual
General Fund revenue for 2010 was $20,320,341, which was $415,086 (2.1 percent) more than budget.
Property tax revenue was over budget by $172,282, as the City conservatively budgets delinquent tax
collections. Charges for services were $120,300 over budget. There were several areas where charges
were higher than anticipated, including the sale of forfeited assets from DWI arrests, public works
engineering fees, and Arts Center program fees. Finally, licenses and permits income was approximately
$90,038 higher than projected, mainly due to more building permits issued in 2010 than expected.
The following graph presents the City's General Fund revenues by source for the last five years. The
graph reflects the City's reliance on property taxes and other local sources of revenue, and shows the
virtual elimination of general state aid revenue in recent years.
All Other
Overall, General Fund revenues increased $93,548 (0.5 percent) from the previous year. Revenue from
property taxes increased $726,941, mainly due to an increase in the City's general levy for lost MVHC
state aid. Intergovernmental revenues increased $170,262 due to the City allocating more of its state aid
street funds to the General Fund for maintenance. Charges for services decreased approximately
$590,353 from last year, mainly due to the City moving its street lighting operation to the Utility
Enterprise Fund in 2010. Other revenue AN as $143,313 less than last year due to decreases in investment
income and other miscellaneous revenues.
The following graphs illustrate the components of General Fund spending for 2010 compared to budget:
General Government
Public Safety
Public Works
Parks and Recreation
$10,000,000
$9,000,000
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$—
General Fund Expenditures
Budget and Actual
$ $1 $2 $3 $4 $5 $6
$7 $8 $9 $10
CI Budget ■ Actual
Total General Fund expenditures for 2010 were $19,783,178, which was $846,460 (4.1 percent) under the
final budget. General Fund expenditures were under budget in every department except for public works
due to the City's cost cutting efforts, which included reductions to personnel, limiting commodity
purchases, and efforts to reduce utility usage. General government expenditures were $217,535 under
budget, mainly in general government facilities and inspections. Public safety department expenditures
were $504,375 lower than anticipated due to a number of factors including, lower personnel costs due to
reduced overtime and fewer fire calls, savings in motor fuels and other commodities, and lower than
expected utility costs for the new police facility. Parks and recreation costs were under budget $153,416,
due in part to the deferral of selected maintenance projects.
The following graph presents the City's General Fund expenditures by function for the last five years.
General Fund Expenditures by Function
Year Ended December 31,
General Government Public Safety
Public Works Parks and Recreation
• 2006 1 2007 ❑ 2008 ® 2009 O 2010
Total General Fund expenditures for 2010 were $132,599 (0.7 percent) higher than the previous year.
Increases in public safety ($467,055) and parks and recreation ($188,883), were offset by reductions in
general government ($178,532) and public works ($344,807). The decrease in public works can be
attributed to the City moving its street lighting operation to the Utility Enterprise Fund this year.
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Millions
LIQUOR FUND
The following graphs present five years of operating results for the Liquor Fund. Data for 2009 has been
restated for the effects of a $186,003 prior period adjustment recorded by the City in 2010.
$16,000,000
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000 —
$4,000,000
$2,000,000 —
$– —
30%
25 %
20%
15%
10%
5%
2006
Liquor Fund – Revenues, Expenses, and Income
Year Ended December 31, 2010
2006 2007
❑ Sales • Cost of Sales Operating Expenses 0 Operating Income
The Liquor Fund ended 2010 with net assets of $6,866,460, an increase of $822,016 from the prior year,
excluding the impact of a prior period adjustment that decreased beginning net assets by $186,003. Of
this, $839,793 represents the investment in capital assets, and $295,133 is restricted in accordance with
revenue bond covenants, leaving $5,731,534 of unrestricted net assets.
Gross liquor sales for 2010 were $14,763,552, a $159,071 (1.1 percent) increase from last year. The
Liquor Fund generated a gross profit of $3,612,321 in 2010, or about 24.5 percent, of gross sales.
Operating expenses for 2010 were $2,242,665, up $10,750 from last year, primarily in other charges and
services. Net operating income for 2010 was $1,369,656, about 9.3 percent of gross sales.
Liquor Fund – Operating Ratios
Year Ended December 31, 2010
2007 2008
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2008 2009 2010
2009
Gross Profit as a Percentage of Sales
❑ Operating Income as a Percentage of Sales
2010
$1 1,000,000
$9,000,000
$7,000,000
$ 5,000,000
$3,000,000
$1,000,000
$(1,000,000)
I
2006 2007
Is Operating Revenue
Income before depreciation
UTILITY FUND
The following graph presents five years of comparative operating results for the City's (water, sewer and
street light) Utility Fund:
Utility Fund
Year Ended December 31,
2008
Operating Expenses
2009 2010
The Utility Fund ended 2010 with net assets of $111,508,237, a decrease of $1,578,608 from the prior
year. Of this, $101,053,649 represents the City's investment in capital assets, net of related debt, leaving
$10,454,588 of unrestricted net assets.
Utility Fund operating revenue was $7,407,029 for 2010, a decrease of $84,645 (1.1 percent). Most of
this decrease was in water revenue, which was about $942,000 lower than last year due changes
implemented in the City's rate structure in 2010 and reduced usage for irrigation due to wetter weather.
This was offset by an increase in sewer charges of about $364,000 due to an increase in rates, and
$513,000 in street light charges which were accounted for in the General Fund in prior years.
Operating expenses (including depreciation of $2,985,475) were $9,928,832, which represents an increase
of $836,981 (9.2 percent). Most of the expense increase was due to the transition of the street light
operation and related electricity provider costs out of the General Fund into the Utility Fund. Over
$590,000 in street light related costs were charged to the Utility Fund in 2010.
GOVERNMENT -WIDE FINANCIAL STATEMENTS
The City's financial statements include fund -based information that focuses on budgetary compliance,
and the sufficiency of the City's current assets to finance its current liabilities. The Governmental
Accounting Standards Board (GASB) Statement No. 34 reporting model also requires the inclusion of
two government -wide financial statements designed to present a clear picture of the City as a single,
unified entity. These government -wide statements provide information on the total cost of delivering
services, including capital assets and long -teen liabilities.
Statement of Net Assets
The Statement of Net Assets essentially tells you what your city owns and owes at a given point in time,
the last day of the fiscal year. Theoretically, net assets represent the resources the City has leftover to use
for providing services after its debts are settled. However, those resources are not always in spendable
form, or there may be restrictions on how some of those resources can be used. Therefore, the Statement
of Net Assets divides the net assets into three components: net assets invested in capital assets, net of
related debt; restricted net assets; and unrestricted net assets.
The following table presents the components of City's net assets as of December 31, 2010 and 2009 for
governmental activities and business -type activities:
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As of December 31, increase
2010 2009* (Decrease)
N et assets
Governmental activities
Invested in capital assets,
net of related debt $ 119,249,751 $ 119,699,102 $ (449,351)
Restricted 10,027,737 10,542,926 (515,189)
Unrestricted 2,324,315 1,210,922 1,113,393
Total governmental activities $ 131,601,803 $ 131,452,950 $ 148,853
Business -type activities
Invested in capital assets,
net of related debt $ 101,893,442 $ 103,150,022 $ (1,256,580)
Restricted 295,133 295,133 —
Unrestricted 16,363,211 15,828,861 534,350
Total business -type activities $ 118,551,786 $ 119,274,016 $ (722,230)
Total net assets $ 250,153,589 $ 250,726,966 $ (573,377)
* 2009 balances have been restated to reflect the prior period adjustment of $186,003 recorded by the City in
2010.
The City's total net assets were $759,380 lower than at the beginning of the year. Business -type activities
decreased net assets by $908,233, which was partially offset by a $148,853 increase from governmental
activities. The City's investment in capital assets, net of related debt, decreased by $1,705,931, which is
primarily due to current year depreciation. Restricted net assets decreased by $515,189, and the
unrestricted net assets, which are available to finance the day -to -day operations of the City, went up by
$1,461,740.
Statement of Activities
The Statement of Activities tracks the City's yearly revenues and expenses, as well as any other
transactions that increase or reduce total net assets. These amounts represent the full cost of providing
services. The Statement of Activities provides a more comprehensive measure than just the amount of
cash that changed hands, as reflected in the fund -based financial statements. This statement includes the
cost of supplies used, depreciation of long -lived capital assets, and other accrual -based expenses.
The following table presents the change in net assets of the City for the years ended December 31, 2010
and 2009:
Net (expense) revenue
Governmental activities
General government
Public safety
Public works
Parks and recreation
Interest on long -term debt
Business -type activities
Liquor
Utility
Total net (expense) revenue
General revenues
Property taxes and tax increments
Investment earnings
Total general revenues
Change in net assets
Expenses
$ 5,248,677
10,858,447
12,197,868
4,775,015
3,740,076
-
2010
Program
Revenues
$ 1,877,517
1,522,355
6,392,875
1,853,064
2,424,290 3,633,133
9,903,296 8,435,371
$ 49,147,669 $ 23,714,315
Net Change
2009
Net Change
as Restated
$ (3,371,160) $ (3,931,519)
(9,336,092) (8,035,060)
(5,804,993) (6,122,590)
(2,921,951) (3,582,546)
(3,740,076) (3,994,790)
1,208,843 1,177,885
(1,467,925) (1,432,982)
(25,433,354) (25,921,602)
24,369,009 23,912,318
490,968 690,147
24,859,977 24,602,465
$ (573,377)
$ (1,319,137)
One of the goals of this statement is to provide a side -by -side comparison to illustrate the difference in the
way the City's governmental and business -type operations are financed. The table clearly illustrates the
dependence of the City's governmental operations on general revenues, such as property taxes and
unrestricted grants. It also shows that, for the most part, the City's business -type activities are generating
sufficient program revenues (service charges and program - specific grants) to cover expenses. This is
critical given the current downward pressures on the general revenue sources.
ACCOUNTING AND AUDITING UPDATES
GASB STATEMENT No. 54 — FUND BALANCE REPORTING AND GOVERNMENTAL FUND TYPE
DEFINITIONS
The objective of this statement is to enhance the usefulness of fund balance information by providing
clearer fund balance classifications that can be more consistently applied and by clarifying the existing
governmental fund type definitions. This statement establishes fund balance classifications
(nonspendable, restricted, committed, assigned, and unassigned) that comprise a hierarchy based
primarily on the extent to which a government is bound to observe constraints imposed upon the use of
the resources reported in governmental funds. The definitions of the general, special revenue, capital
projects, debt service, and permanent fund types are clarified by the provisions in this statement; which
could necessitate changes in fund structure, particularly for existing special revenue funds. Elimination of
the reserved component of fund balance in favor of a restricted classification will enhance the consistency
between information reported in the government -wide statements and information in the governmental
fund financial statements and avoid confusion about the relationship between reserved fund balance and
restricted net assets. The requirements of this statement are effective for financial statements for periods
beginning after June 15, 2010.
GASB STATEMENT NO. 60 — ACCOUNTING AND FINANCIAL REPORTING FOR SERVICE CONCESSION
ARRANGEMENTS
This statement provides accounting and financial reporting guidance for governments that participate as
either a transferor or an operator in a service concession arrangement (SCA). SCAs are arrangements
whereby a government transfers the rights to operate one of its capital assets to a third party operator
(either a private party or another government) for consideration, with the operator then being
compensated from the fees or charges collected in connection with the operation of the asset. To qualify
as an SCA, an arrangement must meet all of the following criteria: 1) the transferor must convey to the
operator both the right and the obligation to use one of its capital assets to provide services to the public;
2) the operator must provide significant consideration to the transferor; 3) the operator must be
compensated from the fees or charges it collects from third parties; 4) the transferor must have the ability
to either determine, modify, or approve what services are to be provided to whom at what price; and
5) the transferor must retain a significant residual interest in the service utility of the asset. This statement
provides guidance to governments that are party to an SCA for reporting the assets, obligations, and flow
of revenues that result from the arrangement; along with the required financial statement disclosures. The
requirements of this statement must be implemented for fiscal year ending December 31, 2012, with
earlier implementation encouraged.
GASB STATEMENT NO. 61 — THE FINANCIAL REPORTING ENTITY: OMNIBUS
This statement amends the current guidance in GASB Statement No. 14, "The Financial Reporting
Entity," for identifying and presenting component units. This statement changes the fiscal dependency
criterion for determining component units. Potential component units that meet the fiscal dependency
criterion for inclusion in the financial reporting entity under existing guidance will only be included if
there is also "financial interdependency" (an ongoing relationship of potential financial benefit or burden)
with the primary government. This statement also clarifies the types of relationships that are considered
to meet the "misleading to exclude" criterion for inclusion as a component unit; changes the criteria for
blending component units; gives direction for the determination and disclosure of major component units;
and adds a requirement to report an explicit, measurable equity interest in a discretely presented
component unit in a statement of position prepared using the economic resources measurement focus.
The requirements of this statement must be implemented for fiscal year ending June 30, 2013, with earlier
implementation encouraged.
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